Homebuyers Seen at Risk on Floating-Rate Loan Rush: Japan Credit

A woman rides a bicycle past residential buildings in the Kachidoki area of Tokyo. The proportion of home loans with adjustable rates has exceeded that of fixed-rate mortgages since at least November 2012. Photographer: Tomohiro Ohsumi/Bloomberg

Aug. 13 (Bloomberg) -- Japanese homebuyers are piling into
floating-rate mortgages, stirring debate over whether they are
too complacent as Bank of Japan stimulus revives inflation.

The proportion of home loans with adjustable rates climbed
to 42.8 percent of Japan’s new lending in February, the highest
since December, according to data from Japan Housing Finance
Agency. The lowest variable mortgage rate at Japan’s three
biggest banks was at 0.775 percent, compared with a 10-year
fixed rate of 1.3 percent.

Outstanding housing loans to individuals expanded to 113.7
trillion yen ($1.1 trillion), the most since at least 1974 in
June as BOJ Governor Haruhiko Kuroda’s monthly sovereign bond
buying aimed at ending deflation made it cheaper than ever to
finance a home purchase. Borrowers like 30-year-old retail
employee Eriko Brown, who chose a flexible-rate mortgage to buy
a house this year, are betting rates won’t rise significantly,
even as global policy makers fret over how to exit from easing.

“The market has become complacent about risks as monetary
easing continues,” said Satoshi Okumoto, chief executive
officer and president in Tokyo at Fukoku Capital Management
Inc., which oversees the equivalent of $18 billion. “Homeowners
aren’t worried about the risk of yields rising even if they
borrow in floating-rate mortgages. They could be caught off
guard.”

Tapering Unforeseeable

The BOJ last week maintained its pledge to increase the
monetary base to 270 trillion yen by the end of the year by
buying about 7 trillion yen in sovereign debt a month. All of
the 34 economists in a Bloomberg News poll expect no tapering
before the first half of 2016, with half saying an end to
stimulus was unforeseeable.

Japan’s 10-year government bond yielded 0.51 percent today,
down 22 1/2 basis points this year and the lowest globally after
Switzerland. The benchmark rate will rise to 0.9 percent at the
end of 2015, economists predict in a Bloomberg survey with the
most recent forecasts given the heaviest weightings.

“Yields may rise, but I don’t expect them to climb so much
in the next decade or so,” Brown said of the house she
purchased with her husband in Yokohama, south of Tokyo. “I
figured all of the debt could be paid down by then.”

That’s what Yusuke Kawano, a 31-year-old financial industry
employee, is counting on too. He took out a 35-year variable
rate mortgage in late 2012 to buy an apartment in Tokyo and
plans to repay it within five to 10 years.

Inflation Expectations

Home loans that are fixed for two to three years before
changing to a variable rate are the most popular now, according
to Takeo Okuhara, a senior fund manager in Tokyo at Daiwa SB
Investments Ltd.

The proportion of home loans with adjustable rates has
exceeded that of fixed-rate mortgages since at least November
2012, when JHFA began compiling bimonthly data. Floating
mortgages accounted for 38 percent of Japan’s new lending in the
two months ended June, from 40.5 percent in March to April,
compared with 31.4 percent for flat-rate mortgages, a JFHA
report showed today.

Rising prices are unlikely to force BOJ policymakers to
taper stimulus any time soon, according to credit market
indicators. The 10-year breakeven rate, derived from the
difference between yields on conventional and index-linked
bonds, was at 1.2 percentage point. Kuroda is targeting 2
percent inflation.

The government is considering whether to raise the sales
tax to 10 percent in 2015. A three percentage point hike in
April caused gross domestic product to shrink an annualized 6.8
percent in the second quarter, the sharpest contraction in more
than three years, according to data released today.

Record Low

“The low mortgage rate will continue for some time as the
BOJ continues to flood the market with cash,” said Akito
Fukunaga, director and chief rates strategist for Japan research
at Barclays Plc. “As we head toward the second increase in the
levy, we could see housing demand pick up somewhat.”

The average 35-year fixed-rate mortgage dropped to 1.69
percent in August, the lowest on record going back to 2004,
according to the latest report from government-affiliated JHFA.
The 30-year U.S. mortgage cost was at 4.14 percent last week,
Freddie Mac data show.

“When we think of a five- to 10-year time horizon, both
yields and inflation will be higher than where we are now,”
said Takahiro Niimi, a researcher in Tokyo at NLI Research
Institute, an affiliate of Nippon Life Insurance Co., Japan’s
biggest life insurer. “Consumers will switch to fixed-rate
mortgages once they foresee a rise in yields at some point.”